Center for Metropolitan Studies Policy Brief Winter 2015/2016 Jeremy Weber1 and Max Harleman2 Innovative Solutions to Regional Issues SHALE DEVELOPMENT, 1. Introduction Shale Gas Development and Public Costs IMPACT FEES, AND MUNICIPAL Pennsylvania covers large portions of two shale formations rich in natural gas, the Marcellus Shale and the Utica Shale. In the FINANCES IN PENNSYLVANIA 2000s, advancements in drilling wells horizontally and in using hydraulics to release gas trapped in shale made drilling in both Executive Summary formations economically attractive. This encouraged extensive drilling, and by 2013 the state had become the country’s second Pennsylvania has experienced wide-spread drilling for natural gas largest producer of natural gas, behind only Texas. Looking in the Marcellus and Utica Shale formations and has become the forward, the U.S. Energy Information Administration estimates country’s second largest producer of natural gas, behind only Texas. that in the coming decades the Marcellus Shale in particular will Although drilling can create jobs and income, it also brings public produce more natural gas than any other formation in the U.S. costs, especially for jurisdictions where drilling occurs. In 2012 the state introduced an Impact Fee on natural gas wells, with revenues Although drilling can create jobs and income, it also brings to be distributed to local governments to address drilling-related public costs. Each well can require hundreds of trips by tractor costs. This brief examines how municipal finances have changed trailers or semi-trucks to bring water, sand, and materials to over time based on drilling activity or proximity to it. Relative to the the well site and then to remove wastewater from the site. baseline period of 2006-2008, we find that: The traffic can degrade roads and generate dust, emissions, • Shale development contributed little to municipal tax revenues. and congestion while waste water mismanagement can create • Municipalities with substantial drilling (High Drilling other costs. The industry and associated economic activity municipalities) experienced: can also increase use of emergency services or the time of – A doubling of non-tax revenues due to the Impact Fee. government staff to address zoning or traffic issues. As a result, – A 30 percent increase in total expenditures, most of which the growth in drilling around the U.S. has often increased local was spent on roads. government spending. – A more than doubling of the fund balance (financial Act 13 and the Impact Fee on Unconventional Wells reserves), indicating that roughly half of Impact Fee Prior to 2012, drilling only affected the revenues of revenue was saved. Pennsylvania’s local governments in so much as it affected Although our analysis does not permit determining if the Impact property values, earned income, or other taxable economic Fee covers the local public costs of shale development, under variables; there was no direct tax on wells or production. Then reasonable assumptions we find that in absence of the Impact Fee in February of 2012, Governor Tom Corbett signed Act 13 into revenues, the typical High Drilling municipality would exhaust its law, which revised the state’s oil and gas law and introduced initial fund balance in three years. 1 Assistant Professor, Graduate School of Public and International Affairs, University of Pittsburgh, Pittsburgh, PA 15260. Email: [email protected]. 2 Research Assistant, Graduate School of Public and International Affairs, University of Pittsburgh, Pittsburgh, PA 15260. Email: [email protected] www.metrostudies.pitt.edu This research was supported by funds from the University of Pittsburgh Mascaro Center for Sustainable Innovation and from the Graduate School of Public and International Affairs. 1 a fee, called the “Impact Fee,” on unconventional wells, defined as wells Data and Impact Fee Reporting: that are drilled into a shale formation Our analysis draws on municipal financial data from the Pennsylvania Department below a specified depth. As suggested by of Community and Economic Development. Some municipalities lack financial data the name, the Impact Fee is intended to for at least some years of our study period. All statistics presented are based on offset the public costs associated with municipalities with complete financial data for the study period. We also use municipal- shale gas development. The Fee is levied level data from the Public Utility Commission for the years 2011-2013, which includes on companies operating wells, with the the number of shale wells drilled and the Fees received in each reporting year. Although Fee varying based on the age of the well the Impact Fee was only authorized in 2012, the Fee applied retroactively. All qualifying and the annual price of natural gas. wells drilled prior to 2012, were treated as having been drilled in 2011. Fees collected for reporting year 2011 were collected and distributed with the Fees for reporting year Impact Fee Disbursement 2012. Municipalities, therefore, first received Impact Fee disbursements in calendar According to the Public Utility year 2012. Commission, the Impact Fee has generated between $200 and $225 million each year for reporting years 2011 occur through the awarding of grants 2. How Has Shale Development and to 2014. For each reporting year, roughly while others are defined based on Impact Fee Revenue Affected $25 million goes to various state agencies population. Municipal Finances? or county conservation districts. Of the remaining Fees collected in the year, 40 The remaining 60 percent of Fee revenue Classification of Municipalities percent go to the Marcellus Legacy Fund, enters the Unconventional Gas Well We focus on municipalities because which funds remediation of abandoned Fund and is disbursed to counties and they bear much of the financial burden wells and infrastructure investments. municipalities. The disbursements from heavy use of roads by the drilling More than half of the Marcellus Legacy depend on the number of wells, industry. They also receive nearly Fund goes directly to state agencies and population, and highway mileage two-thirds (64 percent) of the revenues programs, with the remaining amount in the county or municipality. Local disbursed through the Unconventional disbursed directly to counties. All governments can use the funds based Gas Well Fund. And because of their counties can receive disbursements from on thirteen criteria set forth in the act, generally small budgets, Impact Fee the Legacy Fund, regardless of whether including repairing roads and bridges and revenues represent a larger share of they contain wells. Some disbursements emergency services. annual municipal revenues than they do for counties. Figure 1: Municipal Map of Total Qualifying Wells Drilled Up To 2013 2 Figure 2: Municipalities by Group In line with the geography of the All reported statistics are based on the • Impact Fee Revenue as a Share Marcellus Shale, drilling activity varies median, which is the value at which half of Total Revenue: To measure across the state, with no wells drilled of municipalities (of a given group) have a the importance of Impact Fees in municipalities in the southeast and greater value and half have a lower value. for municipal budgets, for each much drilling in the northeast and The Magnitude and Importance municipality we divide its average the southwest (Figure 1). We divide of Impact Fee Revenues annual disbursement over its average municipalities into four groups based • Impact Fee Disbursements Per Capita: annual municipal revenues for the on drilling activity or proximity to it: High The typical municipality in the High 2009-2011 period. For the typical Drilling, Low Drilling, Near Drilling, and Far Drilling group received $130 in Impact High Drilling municipality, Impact Fee Drilling (Table 1 and Figure 2). We divide Fee disbursements per capita per revenue represented 31.6 percent of the 2006-2013 period into three periods: reporting year, significantly more than the municipality’s average total revenue 2006-2008 (prior to large-scale drilling), the Low Drilling group, which received in the years immediately preceding 2009-2011 (much drilling, without Impact only $11 per capita, or the Near Drilling the Impact Fee (2009-2011). The Fees), and 2012-2013 (much drilling, with Group, which received even less percentage was much lower for the Impact Fees). (Figure 3). Low and Near Drilling groups, at 3.8 and 0.1 percent (Figure 3). Table 1: Classification of Municipalities Number of Municipalities Why Report Median Values? Definition: Total (With Any With Complete Group Although commonly used, the mean “Municipalities that...” Financial Data) Financial Data (or the average) can be very sensitive ..have more than the median 225 201 to observations with extreme values. High Drilling number of wells drilled, among Thus, the inclusion or exclusion of one municipalities with wells or two municipalities with extreme ..have less than the median 203 180 values can substantially change the Low Drilling number of wells drilled, among mean value. In contrast, extreme municipalities with wells values have little, if any, effect on ..have no wells but are in 1,147 965 Near Drilling the median, making it a reliable counties with a shale well measure of the experience of the ..are in counties without a 972 882 Far Drilling typical municipality. shale well All 2,547 2,228 www.metrostudies.pitt.edu 3 Total Revenues Over Time than half of the typical municipality’s • Road Expenditures Per Capita: • Total Revenues Per Capita: During the revenue. Road expenditures increased by 30.3 2012-13 period, the typical municipality • Non-Tax Revenues Per Capita: The percent for the High Drilling group in the High Drilling group experienced increase in total revenues primarily compared to 3.1 percent for the Low a 67.4 percent increase in revenues reflects an increase in non-tax Drilling municipalities. In contrast, road per capita over the 2006-08 value revenues, which includes Impact Fee expenditures decreased for Near and (from $352 to $590) (Table 2).